Tag: affordability

Irish mortgage providers lent €6.4bn for house purchase in 2017, the strongest figure since 2008, with top-ups and re-mortgaging bringing the total to €7.3bn, a 29% increase on the previous year The final quarter was particularly strong, when adjusted for the usual seasonal effects , and we expect further growth in 2018, although affordability is deteriorating and the Central Bank’s modifications to its mortgage controls will no doubt have some impact on First Time Buyers , as Loan to Income is the main constraint for that segment of the market. Indeed, there was a notable slowdown in approvals in the last few months of the year, perhaps indicating that lenders are already adjusting to the rule changes.

Drawdowns were very strong in the final quarter, nonetheless, with over 8,700 mortgages for house purchase including over 5,000 to FTB’s, some 60% of the total. For 2017 as a whole 29,400 mortgages for house purchase were drawn down, still a far cry from the boom figures in excess of 100,000 but significanttly above the low recorded in 2011 (11,000) and 18% above the total in 2016. The value of lending for house purchase implies an average mortgage of over €217,000, against €200,000 in 2016, and a cycle low of €174,000 five years ago.

Interest rates on new loan have not materially changed over that period and household incomes have risen but the increase in mortgage size is such that affordability, the ability to service a mortgage, has deteriorated. Our own model compares the annual cost of a new , 25-year repayment mortgage to our estimate of gross borrower income, and shows that the ratio rose to 30% in 2017, the highest since 2009 and above the long run average (back to 1975) of 29.5. The ratio is still well below the heights recorded at the peak of the boom ( over 40%) but our forecast is for a further deterioration in 2018, to 31.2 , and this assumes no change in interst rates, so any rise in the latter would indicate a greater deterioration.

At the moment a rate rise looks unlikely until 2019, at least, and the affordability change expected does not look material enough to have a significant impact on lending, given the prospect of further gains in employment, an acceleration in wage inflation and stronger house completions. Against that, the Central Bank’s changes to mortgage controls are undoubtedly a policy tightening, in our view, although not sufficient to prevent further growth in new lending, and we anticipate a figure around €9bn in 2018. Net lending has also started to grow in recent months, so the coming year will probably see the first rise in Irish mortgage debt in a decade.

The UK economy defied the consensus expectation of a slowdown last year following the Brexit vote, and fears for the housing market were not realised. The last few months have reignited concerns about both, however, and the news that the Bank of England is now split on whether to raise interest rates ( a 5-3 vote to maintain the status quo) won’t help.

House prices have certainly cooled. The Nationwide index for May showed annual house price inflation at 2.1%, the softest pace in four years, with a clear slowing trend; the index has now fallen for three consecutive months, by a total of 0.9%. The picture from the Halifax index is similar, with annual inflation slowing to 3.3% in May, from 6.5% in December. Both indices are based on mortgage lending and the Office for National Statistics (ONS) publishes a broader but less timely measure, based on Land Registry transactions, which shows an annual rise of 5.6% for April, albeit also pointing to a slowing trend. The RICS data, based on a survey of chartered surveyers operating in the residential market. also reveals a softer market. with a net 17% of respondents in May expecting prices to rise, the weakest reading since the summer of 2016. Buyer and seller inquiries were also seen to have cooled.

Are UK house prices excessive? The average price in the UK is now £209,000 according to the Nationwide, or 48% above the cycle low in early 2009. Prices are also now well above the previous peak ( £186,000) and are 5.3 times the income of First Time Buyers (FTB) against a long run average of 3.6. However, interest rates are unusually low; the standard variable rate is over 4% but the effective rate on new mortgages is around 2% according to the BoE, reflecting discounts and lower fixed rates. Consequently , affordability measures do not suggest prices are overvalued; the Nationwide data, for example, shows mortgage payments at 33% of FTB income, bang in line with the long run average. Indeed, for most of the UK regions affordability is much better than the norm, the exception being London, although non-resident purchasers are more significant in that market.

The supply of housing in the UK is widely thought to be persistently short of the demographic requirement, but completions also fell sharply after the crash, declining to 107,000 in England ( which has the most timely data) from 170,000 in 2007. Completions have picked up again, in response to higher prices, rising to over 140,000 in England in 2016, and the housing starts data points to a higher total again this year. Yet few argue that supply is still anywhere near demand.

Net mortgage lending has been growing, in contrast to Ireland, although at a modest pace relative to historical exerience, but now also appears to be slowing, with annual growth at 2.8% in April against over 3% for most of the past year. Mortgage approvals for house purchase, a more forward looking indicator, fell below 65,000 for the first time in six months in April.

This all may relate to uncertainty about Brexit and the short term economic outlook, with the election result also likely to weigh on sentiment. In our view the likelihood of a more prolonged and sustained period of weakness depends upon the labour market, which to date has held up remarkably well; the employment ratio is at an all-time high, while unemployment is still making new cycle lows. One suspects that UK lenders and the Government would only become seriously concerned about the housing market if cracks started to appear in employment.

We do not as yet have full-year data for the Irish housing market in 2016 but the main developments are clear enough. Transactions remain low, with stamp duty filings some 5% down over the first ten months, implying an annual outturn below the previous year’s 50,000. The later indicates a turnover rate of just 2.5%, against perhaps 3.5%-4% in a more normal market. New mortgage lending did recover a little in 2016, after a marked slowdown in response to the Central Bank’s controls, but the pick up was modest; total lending was an estimated €5.4bn with the number of mortgages for house purchase at some 24,500, or less than 1,000 ahead of 2015. Housing supply also picked up, but at an estimated 14,500 is still well below demand projections , while residential property prices showed strong momentum from mid-year and probably rose by 9-10% nationally. Dublin lagged the rest of the country ,which saw double digit price gains.

Turning to 2017, the market is again likely to be dominated by the shortage of supply relative to demand. Forecasts for the latter had centred around 25,000 a year but are now nearer 30,000, following the release of the 2016 census , showing the return of net immigration. Our supply model is based on lagged registrations ( with some adjustments) and we have pencilled in 17,000 completions for this year, a strong percentage increase on the 2016 figure but clearly still well shy of demand estimates. Moreover, the population is currently rising faster than the housing stock and that will remain the case for 2017 on our forecasts, and that implied decline in the housing stock per capita also adds to the upward pressure on house prices, which are also being supported by rising household incomes and low mortgage rates. As a result we forecast a 12% rise in prices nationally ( to end-December) absent any major demand shocks.

House prices are still below equilibrium on our fundamental model and do not look excessive relative to rents, as the latter have been rising at an annual 8-10% for some time now. This would seem to reflect the supply/ demand imbalance noted above but the Government has decided to intervene in the market by directly limiting rent increases to an annual 4% in areas where rental pressures are deemed acute. Standard economic models would suggest that such controls may be ineffective but if significant may dampen price pressures by reducing the return on rental property and hence its attractiveness as an investment.

Mortgage affordability remains extremely supportive on our model. although 2017 may see some modest deterioration, via a combination of higher average mortgages and a mild pick up in mortgage rates, given the recent rise in longer term interest rates. Nevertheless, affordability will still be better than the long run average and we forecast a significant rise in new lending, driven by the increase in house completions.The Central Bank’s surprise decision to ease mortgage controls in 2017 ( they did not appear to be binding) will also allow increased leverage, and First Time Buyers can also avail of the Help to Buy scheme to bolster the required deposit, so bringing forward housing demand.

In sum, the number of new mortgages for house purchase is projected at 30,000, and a value of €6.4bn, with total new mortgage lending ( i.e. including top ups and re-mortgaging) rising to €7.2bn. That would be the highest figure since 2009, and another step towards what one might call a normally functioning housing market.

The Irish housing market has been characterised for some time now by excess demand, rising prices and a record level in rents, although against a backdrop of contracting mortgage debt . Supply is increasing but at a pace which is lagging the annual growth in demand, so it is difficult to see any change in the existing pattern, at least in the shorter term.

Indeed, house price inflation is now re-accelerating after a slowdown earlier in the year, according to the CSO’s new index. This is now based on all housing transactions, as opposed to those funded by mortgages alone, and showed a marked softening in the market over the winter months including a modest decline in prices in the three months to March. Momentum picked up again over the summer, however, with a 5.2% increase in prices in the three months to end-August, pulling the annual increase up to 7.2%. The earlier slowdown was most pronounced in Dublin and although prices have picked up again in the capital (the annual increase is now 4.5% from 2.6% in June) the re-acceleration has been clearly driven by developments in the rest of the country: prices ex Dublin rose by 7.1% in the three months to end-August, taking the annual increase to 11.4%. That 3-month change is the strongest recorded on the index ( which goes back to 2005) and is reminiscent of the kind of price changes seen in the late 1990’s.It now seems likely that by December the annual increase in prices nationally will be around 10%, which is stronger than many expected and compares with 4.6% in 2015.

Demand for housing would appear to be strengthening: net migration turned positive again in the year to April, employment is rising by around 50,000 a year and wages are increasing again in the private sector, so helping to boost household income. In addition, mortgage rates are falling and our affordability model indicates that the cost of servicing a new mortgage relative to income is at levels last seen in the late 1990’s. New mortgage lending is indeed picking up, after a softer period post the introdution of the Central Bank’s macroprudential controls, but the increase is modest; some 17,300 loans for house purchase were drawn down in the first nine months of 2016, against 16,900 in the same period of 2015. For this year as a whole we expect a total of around 24,500 or 3% above the previous year. In value terms that equates to €4.8bn, and €5.3bn for total mortgage lending ( which includes top-ups and re-mortaging, with the latter rising rapidly in percentage terms, albeit from a very low base).

New lending is still being offset by debt repayment and this deleveraging has been evident now for six and a half years, although the most recent data does indicate that the pace of credit contraction is slowing. Another unusual feature of the market has been the preponderance of non-mortgage buyers , accounting for 50% or more of transactions. The third quarter data currently indicates that mortgage loans accounted for over 56% of transactions as recorded in the Property Price Register, perhaps indicating a slight change, although it is too early to say as the numbers on the Register are continually updated.

Residential rents have been growing at a steady 8%-10% annual pace for some three years now and the latest CSO data, for September, shows little change, with an annual 9.6% increase despite the Government’s rent controls.

What about supply, which is universally recognised as inadequate. Completions in the first eight months of the year amounted to just over 9,100, with the full-year figure likely to be around 14,500 or less than 2,000 above the previous year. Forward looking indicators do not signal any dramatic change, with planning permissions for 6,200 units granted in the first 6 months of 2016.

Housing supply may well respond to higher prices in time but there is no quick fix to the current position of excess demand. In that context the announcement of a Help to Buy scheme in the recent Budget is hard to fathom, as it offers First Time Buyers a tax rebate towards their deposit. so presumably boosting demand further.The Finance Minister suggested that this would help to stimulate new builds but it’s hard to argue that demand is the issue, rather than supply.

New Irish mortgage lending for house purchase peaked in 2006 at some €28bn, with over 110k mortgages drawn down, and subsequently fell, collapsing completely from 2008 onwards before bottoming out in 2011 with a value figure of just €2.1bn and a volume total of 11k. The ending of mortgage tax relief in 2012 prompted borrowers to bring forward their draw down which helped to boost lending to €2.5bn in that year but the corollary was a weaker figure in 2013, with the value of lending slipping to €2.4bn alongside a fall in volume from the 14k seen the previous year. Lending has picked up substantially this year, however, and the annual total may well rise to around €3bn, with perhaps over 16k new mortgages for house purchase likely to be drawn down.

The past year has certainly seen some positive changes in terms of both the supply of credit and the demand for mortgages. The number of active lenders fell away sharply in the downturn and is still low but credit standards are back to more normal levels , having tightened considerably at the onset of the recession ( credit standards always tend to be pro-cyclical). On the demand side affordability is back to the benign levels seen in the latter part of the 1990’s and employment is rising which has helped to support household incomes, the main driver of mortgage demand. Price expectations ,too, play a part, and few now doubt that the market has bottomed, at least in the main cities, particularly the capital.

The latest new lending figures from the Irish Banking Federation (IBF) show that 4337 mortgages for house purchase were drawn down in the second quarter, an increase of 52% on the same period last year and compared with 3126 in the first quarter. Buy-to-let mortgages account for less than 5% of the total compared with a quarter at the peak of the boom, although the rental yield is now higher than the mortgage rate which was certainly not the case in 2006 and 2007. First -time buyers now dominate, accounting for well over half the total (from a third at the peak) with the balance made up by those moving house, a segment that has taken a much more stable proportion of lending.

The average new mortgage for house purchase is also rising, as one might expect given the rise in house prices nationally, increasing by over 5% at an annual rate in the second quarter, to just over €178k. As a result the total value of mortgage lending for house purchase in q2 was €773m or 60% up on the previous year, following a figure of €539m in the first quarter.

These annual growth figures are clearly very impressive but when put in context the housing market is still far from what might be considered liquid and healthy. Total transactions amounted to over 8700 in the second quarter, for example, according to the Property Price Register , so the mortgage data implies that less than half of transactions are being funded by bank credit, which remains unusually low. In addition, mortgage repayments are still outpacing new lending so net mortgage lending is still contracting; net lending fell by a total of €1.5bn in the first six months of 2014, which implies repayments of €2.8bn given that new lending (as per the IBF data) was €1.3bn.

What level of mortgage lending would take place in a healthy market?. One approach is to assume that a 3%-4% annual turnover in housing transactions is normal, implying transactions of 60k-80k (there are approximately 2m houses in Ireland) compared with around 30k last year, Again, perhaps 80%-85% might be normally funded via a mortgage so that gives a mortgage volume figure in the region of say 50k-60k per annum. The 2014 outturn may well be around 16k so we are still a long way away from an equilibrium, although lending is clearly now finally moving in the right direction.

Irish residential property prices fell by 4.5% in 2012 according to the CSO index and by 2.5% in Dublin, and although most commentators expected the market to pick up a little in 2013 few if any envisaged the pace of price appreciation that developed in the capital; Dublin prices rose by 15.7% last year with apartments outstripping houses, appreciating by 20.8% against 15.3% for the latter. Residential prices in the capital have still fallen by some 49% from the peak but the strength of the recent rally has prompted some to forecast further double digit gains in 2014. That appears unlikely for a number of reasons.

The case for some further price appreciation nationally and in the capital can certainly be made. A range of studies since 2012, including work from the Irish Central Bank, the IMF and the OECD, have signaled that Irish house prices probably fell too far in relation to housing fundamentals, such as income and rents. The latter has risen strongly now for a few years ( the latest CSO data for November puts the annual increase in national residential rents at 8.5%) and house prices relative to rents are now well below the long term average. That is the equivalent of stating that the average yield on residential property ( i.e the average rent divided by the current price ) is also well above the longer term trend and on my data base is just shy of 6%, the highest in a decade. Affordability is also a plus for the market; a new 25-year mortgage absorbs 24% of income in 2013 which is well below the 29% long term average on my affordability index and back to levels last seen in 1998. Employment is also rising and price expectations have also probably shifted, with more people expecting prices to rise and hence helping to bring forward purchases. House building is also at record lows ( averaging around 2,000 a quarter in 2013), albeit bottoming out, and the vacancy rate in parts of the capital is low. There would not appear to be a significant supply shortage in apartments, however, yet apartment prices appreciated faster than house prices last year both nationally and in Dublin, albeit from a lower base, which implies that supply is not the sole explanation for the trend in prices.The vacancy rate outside the capital is much higher nonetheless, so in theory at least there is more excess supply to meet the increase in demand, which helps to explain why prices outside Dublin were broadly flat last year, but having fallen by 6.1% in 2012.

Dublin property price inflation may well decelerate this year, although still rising at a single digit rate. In part this expectation reflects the nature of the market last year, with cash transactions probably accounting for slightly over half the total recorded by the Property Price register ( the IBF data on mortgage drawdowns is not yet available for the full year) although the proportion funded by credit did rise through the year and may have been around 54% in the final quarter. Ultimately housing is largely driven by credit and mortgage lending may well pick up this year but is still likely to be a a level which is not compatible with further price appreciation at the pace seen last year in Dublin. Repossessions are also on the rise which may dampen price pressures somewhat while the trend in the price index itself in 2013 is another factor arguing for deceleration; prices rose by 2.4% in the second quarter, by 9.5% in q3 and 3.9% in the final quarter and so annual property price inflation in Dublin is likely to slow in the second half of 2014 as those base effects kick in.